Russia Just Went Ahead And Dumped 84% of its American Debt

The US currency has come under increasing pressure in 2018 as US debt mounts and the increasing budget deficit is likely to force the federal government to seek $56 billion more from this quarter than was previously expected and this amount is very close to the US Treasury securities sold by Russia in April-May. Due to an increase in expenditure and fall in receipts of tax, the government had to borrow the biggest amount since the financial crisis of 2008, as it counts for the 5thlargest borrowing (quarterly) as of this writing. Earlier in 2018, the Russians dumped 84% of their holding in USA’s Treasury securities, thereby dropping off from the list of 33 biggest foreign-origin owners of US bonds. The country’s holdings fell sharply from about $96.1 billion during the month of March to only $14.9 billion by May.

Do we not sound any alarm bells?

The Russian Federation’s sharp reduction in its holdings of this country’s Treasury Bonds has had Russia’s ownership recently falling to a low in 11 years as Russia’s ownership now stands at $14.9 billion, according to the latest data made available by the US Treasury. Russia used to be in the top ten countries of 2010 with an ownership of $176.3 billion in assets but now ranks even below Chile with respect to US Treasury bonds. Russia’s sell-off of US Treasury Bonds began by the year 2011 and gained momentum with the US imposing stringent sanctions against the country. Central Bank of Russia, or CBR, explained the reason behind slashing of their bonds being the concern over various economic, geopolitical and financial risks but it is considered as ‘routine’ to offset these risks.

Signs of an economic attack?

The Russian Federation had been purchasing huge amounts of bullion as it continued to sell their US Treasury bonds, and recently overtook the People’s Republic of China to become the world’s biggest holder of gold bullion, which is said to be near the staggering figure of $80.5 billion, if CBR is to be believed. China holds about $1183 billion of US ‘s debt, the most by any foreign nation but with the possibility of trade wars looming any day now, similar divesting of assets and US Treasury Bonds by China comes with a high likelihood. Turkey, similarly has reduced 50% of its US debt holdings; it has now reduced from $62 billion in the previous year (2017) to only $32.6 billion in the month of May of 2018. Although Germany’s Bond holdings still stand at steadfast at $78.3 billion.

Retaliation for Rusal

This sudden dump of debt could have brought about a short-term surge in the Treasury rates that seem to have fazed the market as the Treasury yields (10 year kinds) topped 3% this April for the first time ever, since 2014, that is. It gave traction to a feverish game of guessing about Moscow’s actions and motivations. Maybe Russia did, in fact, need to diversify its investment portfolio, as stated by the country’s central bank, or just maybe they was seeking to retaliate for Washington DC’s crippling trade sanctions on Russian aluminum maker Rusal.

At that time, a spokesperson for US Treasury indicated that this sell off would not have any significant impact, reiterating that the US Treasury Bond market was at it’s most liquid and deepest form yet, even among all other countries and that it’s demand remained robust. Since May 2018, the foreign countries owned over $6 trillion worth of US securities. Now, the US Treasury Department proposes to generate $329 billion worth of bonds through the credit markets for the months of July-September. This new projection included the end of the quarter cash fund of about $350 billion. This forecast by the department for the months of October-December was around the figure of $440 billion, shooting up the borrowings figures for the 2nd half of 2018 to an estimated $769 billion, highest it has been since the 3rdquarter in 2008, when the figures experienced a high of $1.1 trillion. When there is talk of the bonds market, the investors are said to anticipate faster gains via maturity over 5 years. This spike may push up the yields up at a much faster pace than for longer held and dated securities. The hike in borrowing, which is yet to be announced, is expected to appreciate the size of the various bonds and the note offerings.

This boost of government borrowings is said to be because of tax cuts of corporations and businesses houses, as the major spending hike which inflated the deficit budget. With President Trump sanctioning $1.5 trillion for tax cuts, it is expected to persuade US companies to divert about $2 trillion back home from accounts held in foreign countries.